Bitcoin's Achille's Heel

Bitcoin's biggest weakness is its vulnerability to the rise of other cryptocurrencies. Dozens of altcoins exist already - dogecoin, litecoin, cryptonote, darkcoin... Most of these run on a core code that is nearly identical to bitcoin's. Starting a new crypto currency is as easy as copying the open source bitcoin code, changing the name, modifying a few details then starting the mining (gotta do it right though - look at the recent forked failure of Auroracoin).

If 10 competing cyrptocurrencies of the same size and popularity as bitcoin were to appear on the scene then the potential future value of the bitcoin would be diminished by 10x. Then, rather than rising over the next 3 years to its projected value of $100,000 (see chart below) bitcoin would rise only to $10,000 .

How real is this threat?   The answer hinges on what makes a good competing cryptocurrency. As I see it, there are five requirements:

• it must have a system/network that is secure, that is independently run and that operates well (few glitches, reasonably fast transactions);

• it must have a large number of users, and the users must trust it

• it must be supported by well established independent companies that provide services and that work with the currency- services such as currency exchanges, account (or wallet) services, user conveniences (ATMs, news and other info regarding the currency), loan agencies and the like;

• it must have a lot of businesses that accept the currency for payments and other; 

• it must be able to adapt and must have individuals and institutions that will help foster the changes and adaptations (e.g.: The BitcoinFoundation).

Compared with any of the altcoins out there today, Bitcoin has a huge lead in these five requirements has a 20x lead in market cap. For this reason it is unlikely that any of the existing altcoins will rise to the level of bitcoin. Bitcoin's lead is just too big. Without a greatly accelerated start, bitcoin-like competitors will likely never catch up.

There is the possibility of altcoins with significantly better attributes.  But this wouldn't necessarily be a threat because bitcoin could just adapt and incorporate those better attributes into itself.

However, a government or corporate backed cryptocurrency, if tried, and if done right, could be a success and could quickly overtake bitcoin.

Bitcoin's market value today is only about $6 billion. The value of all of the mining operations supporting the bitcoin system is maybe $1 billion. Imagine if a big bank were to invest $40 billion (just one year's worth of profit for the biggest banks) into its own cryptocurrency, call it bigbankcoin. And of that investment, imagine that $30 billion were spent on minting 30 million bigbankcoins and guaranteeing each to be cashable for $1000 one year from date of issue. (Bigbank could spend the other $10B on advertizing, coding, establishing well balanced and distributed mining, etc.). And further imagine that the 30 million freshly minted coins were given out free to 30 million individuals.

This scenario would result in a first day market value 5 times the size of bitcoin's, and 30 million individuals each with $1000 worth of bigbankcoin burning a hole in their pocket! You can bet private industry services catering to bigbankcoin would rapidly appear.  And retailers open to accepting bigbankcoins would VERY rapidly appear.

In the same way, californiacoin might be started by the state of California. Or our federal government might start USAcoin. Or Google might spend $40 billion and start googcoin (or maybe IBM coin? 3/12/20015 article).

other stuff:

        CoinDesk State of Bitcoin Q1 2014